Why Bigger Isn't Always Better: The Truth About Job Margins

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ℹ ABOUT THIS EPISODE

Discover why that big, high-margin job might actually hurt your bottom line. Wade and Stephen break down the throughput method, analyzing profit per week instead of just profit margins.

Learn how to evaluate job decisions based on speed of profit generation, cash flow timing, and operational constraints. 

Plus real case studies showing when overtime, equipment investment, and hiring coordination staff actually increase profitability despite higher costs.

⌚️ Key moments in this episode:

• 00:00 Introduction: Choosing the Right Job Path
• 00:36 Recap of Previous Episodes
• 01:39 Profit Improvement Potential
• 03:23 Understanding Throughput
• 08:38 Case Studies and Practical Examples
• 20:15 Final Thoughts and Resources

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

 [00:00:00] 

Wade Carpenter: If you had the choice of two job paths, one big job with a bigger gross margin versus four smaller jobs at a lower margin, and the goal was more bottom line profit, which should you take? Not rocket science, right? What if I told you might be wrong? That's what we're talking about today.

This is the Contractor Success Forum, and the fourth joint episode with the new channel Profit First Construction.

I'm Wade Carpenter with Carpenter and Company CPAs alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. And Stephen, I think this is gonna be a fun one, but first, can you recap us and let us know how we got here? 

Stephen Brown: Sure. Wade, this is the fourth of four podcasts on this subject matter. And the first subject matter was Profit, Improving Your Potential. The second one was specific levers that you can apply to make small changes that are gonna help your cash flow and your bottom line.

The third one was segmentation. And by that we were meaning IDing [00:01:00] your Sweet Spot. Of all the type work you're doing, how do you target and focus on the sweet Spot, the very best of all projects?

Well, you can say, Wade, your question that you've started this podcast with is easy. If both of them are making the same gross profit, you stick with the bigger one because four are more headaches than just handling one. Right?

Wade Carpenter: Well, I'm changing that up. What if the bigger problem one actually had higher profit?

Stephen Brown: The most important thing that you have to ask yourself is, what is the right question? And I'm thinking right now, the right question is how do we measure that and make the right decision?

Wade Carpenter: I hope what our listeners are getting out of this, all four of these have been about how can we improve that Profit Improvement Potential? And I know we talked in that first one a lot about those small improvements as well as, I think we had some revelations about the pricing.

So if we raised our prices by say 10%, how many could we afford to [00:02:00] lose? Versus if we're gonna cut our price by 10%? How many customers would we have to gain just to get back to the same level profitability? I think there was hopefully some aha moments in all those episodes. I would suggest highly that they go back and watch all three of them.

Stephen Brown: You said if you cut your costs by 10%, how many customers would you have to get to get back to your same level of profitability? Some contractors are doing that and they're not realizing they're getting back to their same level of non-profitability. They cut prices when they're losing money thinking that's the answer.

Wade Carpenter: Yeah. And the last time we talked about segmentation and finding where those jobs are, whether it's a different industry, commercial versus residential versus working on churches versus working on retail shops or whatever your type of construction you do, it could be different levels of say quarter million dollar job or half million dollar job or a million dollar job. Where are you finding that sweet spot?

Today I want to go [00:03:00] into another dimension of that. We've done a couple of podcasts over the years on this and I think this was one of the more popular ones, if I'm not mistaken, it's probably the most popular one we ever had on YouTube.

We obviously didn't have the visuals then. So that's why I love talking about this stuff because it makes people really think about what they're doing. And I hope it makes everybody think about that today. 

Stephen Brown: Sure. Tell us again what throughput means.

Wade Carpenter: Let me explain that. Basically, in a nutshell it's how fast are you turning profit? 

Stephen Brown: Okay. 

Wade Carpenter: So in our example here, this is the exact same example I showed in that other one but now we can do it visually.

So if you're listening to the podcast, you may wanna check us out on either channel, the Profit First Construction Channel, or the Contractor Success Forum channel.

Let me set this up by saying we've got the option of taking a $1.2 million job at a 20% margin versus a $300,000 job at a 17% margin.

Usually the bigger the job, the [00:04:00] lower the margin is. But in this case we would have to do four jobs to make the same 1.2 million. And the thing I posed back then is we got one crew, one path, and we can't do both. 

Stephen Brown: Okay, now are we assuming that both the one big job and the four $300,000 jobs are all gonna take roughly the same amount of time to complete?

Wade Carpenter: That's where we're going here. So let's just say, we could do a one year job that was 52 weeks versus the 300,000 jobs, we could turn four of them in a year. We would make the same gross revenue at $1.2 million, but we would not make the same level of profitability.

One job, 52 weeks, that's $240,000 profit. 17% margin, that's $204,000 profit. That would be silly, right? That's a fundamental question, right? 

Stephen Brown: Correct. 

Wade Carpenter: So if we're making the same total revenue, if we're looking at how much profit we have [00:05:00] over time, if we just had the same scenario, one job, but we could say, turn that job over a little faster, say, if we did it in 12 weeks, our throughput in this profit per week would be $4,250 versus $4,615.

Yeah, that's a little better, but if we jump to 11 weeks, if we could turn that job faster, we don't have as many moving parts, the throughput is pretty close. It actually exceeds that.

What if we could turn them in 10 weeks? Maybe we could take all those extra time, we only worked 40 weeks a year and made same level of gross profit our $1.2 million, then we can go deer hunting or go fishing half the summer.

We could choose to take the extra time off or-- again, this is theoretical, but what if we could turn more of these jobs, right? So if we turn that profit up to five jobs.

Let me just do a side by side comparison. [00:06:00] Let's just say we could turn six jobs at 10 weeks. And again it is theoretical. We have one crew and we can only work on one at a time. The profit in a year would be an extra $25,000 in the course of a year.

So the idea is, you could theoretically have more profit, assuming they were taking the same amount of time, but that's where throughput comes into play. How fast are you turning profit?

This is the same sort of scenario that we had talked about in those other episodes. But today I wanna think about it from a different standpoint. How fast are we turning these profit jobs?

In segmentation we talk about what are the headaches for that? You may have one job and assuming that this person pays the same quickness as the other guy, what if these people take 60 or 90 days to pay versus $300,000 jobs, they pay within 30 days or 15 days or something like that?

Stephen Brown: I love your calculator [00:07:00] because a lot of times we get just hung up on thinking of a calendar year of 12 months. Contractors look at things at how many weeks. So this calculator is great. You can spread something out that you can assume a different number of weeks and you should add the column of how often you get paid. Right?

Wade Carpenter: Right, and I mean, again, this exercise is really more for our contractors to go out there and think about, not just, is this job more profitable? Is it something we're good at? Whether you can turn it faster, or whatever the bottom line, what are we making in a year?

How are we building a healthy company? And there's a lot of things to think about, like the cash flow effects of it. Are you having to pay your crew versus subbing everything out and how fast are they turning that? So essentially we're looking at how fast can we make this profit?

And there's some things that I want to talk about today that we didn't really go into and this is based on the theory of constraints, which we've talked about the book, The Goal. It was written back in the eighties, and it was set in a [00:08:00] manufacturing environment. Manufacturing, you can have assembly line and all these moving parts, and there may be a lot of different parts, but they're generally the same.

In construction, there's no cookie cutter jobs. You could say that, too, and you may have several of them that you do exactly the same. But there's a lot more moving parts in construction and a lot more things that can go wrong.

What they were looking at is how fast do they make a profit? This is just one way of thinking about can we make it faster per week? And if we're turning it faster, can we actually make more profit that way? Make sense? 

Stephen Brown: Yep. 

Wade Carpenter: Here's a couple of different ways we can think about it.

So say this tower crew did a bunch of multi-unit residential type tile jobs. They specialized in bathrooms. Let's just say they were averaging about six baths per week. They built about $12,000 per bathroom. The costs on that bathroom were like four grand, so they were netting about $8,000 per bathroom. And then they think [00:09:00] about weekly overhead I've gotta cover, all the back office stuff and everything, was $40,000.

$,000 times six is 48,000 minus 40. They were making about $8,000 net profit per week. 

Think about how fast they were turning that profit. What if they said, okay, these guys like to work and they like to make money. What if we worked on Saturdays instead? We gotta pay time and a half on that.

So what if we said, overtime would cost us an additional $7,000 per week. You see where I'm going with this? Our weekly overhead really wouldn't change, but if we threw in $7,000 a week extra costs, but we could get eight bathrooms out of it, then what happens? So let's say we kicked that up to eight or something like that. How fast can we turn this?

Every owner I know beats people up, hey, we can't pay overtime. We're trying to keep all this stuff down, but you know, how fast can we turn [00:10:00] this?

If we start looking at it and we've got the capacity to do it, let's just say there was one crew that could do it, in this particular case, even though we would pay extra $7,000 overtime, our net would grow from $8,000 per week to $17,000 per week. Does that make sense?

And again, when you're in backlog, you got too much backlog, you may be losing work. Part of this is about like capitalizing on capacity. I'm not saying this is always the right category, but a way to think about it is what's the best way to generate the profit?

And you gotta look at it. There's no hard and fast answers. But if you're thinking about it and just quickly dismiss just because we gotta pay overtime, we're gonna blow our budget, that might be true if you don't do anything any faster.

So again, in this case, if you spend an extra $7,000 a week, but that generates another $7,000 additional profit, that's where I'm thinking that [00:11:00] most of these owners would be beating up on that project manager that said, why are you having all this overtime? I'm not making that much profit.

Can we try a couple of different thoughts on this too? 

Stephen Brown: Sure. 

Wade Carpenter: Okay, we got an earthwork contractor. And they're thinking, we wanna turn more work. They're running into problems where, okay, well if we just had another excavator, then we could turn this, but maybe they're hauling stuff off or whatever.

Let's just say they had 10 hauling trucks that could do 15 cubic yards and it took 45 minutes to get those trucks in so they could actually haul the stuff off. What we found, this was an actual situation I had where, they were thinking, let's just get another excavator.

But when we started looking at it, it's like, okay, if we raise the number of trucks to haul it off and cut that cycle time down, we actually were gaining 12.5% throughput. The answer surprised even me. What we all thought was the right answer was the wrong answer because we figured out that their throughput, how [00:12:00] fast they were making this profit, was dependent on not the excavators. Because they were really sitting idle for part of the time.

If we're raising the number of trucks and the capacity, maybe you've got some bigger trucks, or, I don't know.

Stephen Brown: Mm-hmm. 

Wade Carpenter: If you could improve that cycle time down to-- and again we could go into a lot of different situations, but today, I'm just really trying to give some things for people to think about where, you know, how fast are we turning this profit? Sometimes it's not always the things that are obvious.

Stephen Brown: A lot of times the key to making a home run profit on a job is if you've bid the job the way everybody else bids it, then you figure out a more profitable and faster way to get that work done. And, that's the story as old as time in the construction business is doing that.

I think using this throughput analysis will definitely help our customers understand how it will help them when they turn their bids in. How to perform properly, make the profits that they wanna make, and [00:13:00] still beat their competitors because they're bidding things differently. 

Wade Carpenter: Yeah. Now, this is not the same contractor, but over the summer I had this contractor that was telling me, I thought he was nuts 'cause he was spending tons of money on new equipment. He was getting these, I mean what was it, a hundred thousand dollars plus to get all these excavator outfit with the GPS and AI, stuff like that.

But when we started looking at how fast they could grade it without human intervention, and he was turning the jobs faster. So I was just really shocked when we can actually make more money. I'm not saying to go spend more money, I'm saying look at it. When we start looking at how fast we can improve over our baseline, again, in this case it was not the excavator.

There's a concept, Little's Law, there was a economist, I guess he was that came up with this book before Eli Goldratt and some of his earlier work. But, how fast are we turning this work is the thought.

Stephen Brown: I get it. [00:14:00] And if we put a podcast out titled" Increase your Profits by Buying More "Equipment that'd be an evil- 

Wade Carpenter: yeah, I know that'd be click bait. But yeah, I know what you're saying.

There's another one, if we're having problems where we're getting stuff hung up by the architect or something like that. And it was just a matter of, we couldn't get it through there because we're trying to do too many things.

So should we think about, we're gonna hire somebody to do this, versus everybody's jumping in and doing this and not getting the stuff to the architect on time so we can put it through?

And so the question was, this is a modified version of something we did with somebody, could we afford to hire a coordinator to do this? It was taking extra time. If we could cycle through the jobs and getting them out faster by paying an extra $2,500 a week in this case, it cut the cycle time down by two weeks.

We actually were able to get the jobs [00:15:00] in and moving faster by putting somebody in that place. I've also seen people doing things like that with purchasing agents. Take some of that stuff off the project managers. I feel like I'm just throwing case studies at you, but I'm hoping they're landing a little bit here. 

Stephen Brown: No. They are. I'm thinking about the four jobs versus one job. In construction no one job site is exactly the same. Each one has its own strengths and weaknesses as far as your ability to perform it in a perfect ideal way, so there's everything from elevation to the owner to the climate to the geographical location of it, to what's underneath the ground, to weather patterns, to the owner and the architect and engineer on staff and your ability to work with them.

I guess I wonder if you could put a factor in your analysis sheet of just putting a plus or minus percentage factor, depending on that particular project and how [00:16:00] favorable it is to making the profit. Folks know that, Wade. 

Wade Carpenter: That's part of where I was going with this is if you're segmenting your jobs from the last episode it's not just, what is the margin, but how fast do they pay? How fast can we get them done? That's kinda where we're going. 

Stephen Brown: That's right. 

Wade Carpenter: So let me hit these last couple of case studies. I know this is a sore spot for many of my contractors, getting inspections done. I know it's a separate question about Hey, how do we get the contractors out there? And we're not talking about going out there and greasing the palms.

What I'm talking about is, what if we had a lot of failed inspections because we were rushing to get things done and we run up there and things get put behind because things had to be redone.

So, what if we had paid somebody extra or got somebody like a quality control person, would that make more sense?

If we could actually improve our pass rate... I'm thinking about another conversation I had with [00:17:00] a contractor. Like, okay, our job drags out a little longer and we had equipment on that job that we're renting, and it stays out there two or three weeks more. There goes that profit, right?

So these are the kind of things that, obviously we're constrained by all these people that, you know, getting the inspectors out there, but if we could improve our pass rate-- I'm not gonna try to explain all this, but in this case, we were able to effectively increase our pass rate. And by doing that, it translated to like 26% increase in throughput. That allowed us to pass the things along faster and wrap them up and start on another one. 

Stephen Brown: I like the thinking of that.

Wade Carpenter: And we think about products and things like that.

But what if we had, just going back to the same type of thing with our first job, we had one crane that could be very expensive and one crew that can run, say up to 20 days a month. And we were looking at our job mix.

We [00:18:00] had one big job where they had to be out on a job for 12 days, and it's like a $120,000 margin. So they were making like 10 grand a day, versus Job B they were only out there six days and the margin on that was 90,000. So they were making 15 per day.

But they were thinking, okay, we're gonna stay there on one job and it's fewer times we had to move it and all that stuff.

There was a C and D here, but we actually had a third scenario in this case where our margin actually went up to 20,000 a day because we could do a premium for mobilization.

I don't wanna get too deep in the weeds on this stuff, but what we did in this particular case was instead of taking one big job and then we're sorta limited on taking some of these smaller jobs, by changing the mix, our constraint in this case was that crane, and it could only be one place at one time. In short it's 60 grand more profit.

Stephen Brown: You can use the same analysis and if you had a bunch of cranes [00:19:00] working and lost time, what factor do you put in there because the cranes aren't working properly in the timeframe you've assigned for them to operate to make your profit? You can tweak the same thing to tell you a lot of information that you need.

Wade Carpenter: Sometimes it just takes some outside the box thinking. When we put something like this together and we're in the thick of things and all we're trying to do is like, oh, let's just find that next job, and we take what comes along versus really looking at your operation, where you're making the profit, and not just looking at the margin.

How fast they pay you, these are the kind of things if you really will sit down and take a look at what you're making I think it can make a big difference in a company's profitability. So 

Stephen Brown: Okay. 

Wade Carpenter: That's the gist of it.

Stephen Brown: I love it. So what was the submittals button? 

Wade Carpenter: So that was how fast they were getting stuff to the architect in this case and getting things turned back in, [00:20:00] because they just didn't have as much administrative help.

They hired somebody to take care of that. Even though they were paying more money, it increased the profitability by the ability to get the jobs rolling faster. Does that make sense? 

Stephen Brown: Yep.

Wade Carpenter: I hope this whole series, if nothing else, made you think about your jobs in different ways that you may never have thought about them before.

Stephen Brown: It's amazing how the small stuff contributes to the big thing and as far as bottom line is concerned. And it's amazing to me from these last four series, Wade, is when you talk about business levers, to me that's changing and tweaking something that's so small that affects so many different things in a positive or negative way, and how to analyze that.

So I've really enjoyed it.

Wade Carpenter: I haven't really seen too many people talking about throughput and they're all just like, okay, let's just raise our margins. But they don't think about what that does. I do think maybe we [00:21:00] learned some lessons with the profitability and raising the prices and not being afraid to raise your prices and thinking, I'm never gonna get a job again.

Just finding that sweet spot. That's what it's all about. 

Stephen Brown: And you know that old saying that time is money is so true as well. The time it takes you to finish a job and turn over another job is so important because the longer a job takes to complete, the more factors might come to influence your ability to finish it.

One of the biggest one is that job goes on longer, and that's not a problem as long as it's going longer because you're getting big change orders.

Wade Carpenter: Hopefully.

Stephen Brown: So that, that's all I was saying about that. 

Wade Carpenter: Okay. Like I said, I've really enjoyed you letting me blindside you on all these things because I didn't give you a whole lot of context for any of them. But I had fun with them. And if you got something out of this too, I did actually put a whole booklet together that sort of explains a lot of these concepts.

You're welcome to reach out to our carpentercpas.com [00:22:00] website. It's how to improve the profitability of your construction company. Just put in your email and it'll send it right to you. So if you're interested in that, just let us know. We'll put something down in the comments below.

So with that, we do this every week and appreciate it if you like, share, subscribe both channels to the Contractor Success Forum or the brand new Profit First Construction website. I was really pleased to see how much we're picking up on that one really quickly.

I wanted to thank you all for listening. We will see you on the next show.